Kansas tax law comes with surprise

Sunday

Mar 30, 2014 at 12:01 AMMar 30, 2014 at 9:45 PM

By Ken StephensThe Hutchinson Newskstephens@hutchnews.com

Some small businesses, sole proprietors and independent contractors may have had a rude awakening while having their 2013 Kansas income tax prepared this spring if they’re used to claiming an operating loss.

The same 2012 tax overhaul that eliminated Kansas income tax on many forms of non-wage income when their side business earns a profit also eliminated their ability to use a business loss to offset other forms of taxable income, including wages, beginning on their 2013 Kansas income tax return.

Some people, including Sharon L. Gordon of Udall, are calling that an unintended consequence of the law that needs to be addressed by the Legislature. But two experts on Kansas tax policy say it’s a logical outcome of eliminating the tax on profits.

Gordon, who lives on a farm outside Udall, was laid off from her job as a corporate attorney about a year and a half ago. She collected unemployment, withdrew money from her IRA to get by, and then started practicing law for a f ew clients out of her home.

Her fledgling law practice produced a net loss for the year, which she had hoped to use to offset some of her tax liability for her unemployment income and withdrawals from her IRA. That worked on her federal taxes, but then she was surprised when she had to add the operating loss back into her Kansas income.

“So I paid more to Kansas this year than to the feds. When does that ever happen?” she said.

Richard Cram, director of policy and research at the Kansas Department of Revenue, and Martin Dickinson, a tax law expert at the University of Kansas, said it’s a matter of fairness.

“The rationale is simply that if we’re no longer going to tax sole proprietorships or non-wage income by proprietors, farmers, partnerships, it doesn’t make sense that you should be able to use losses to protect other taxable income,” Cram said. “If you are a full-time wage earner and have a sole proprietorship on the side and your sole proprietorship loses $50,000 and as an individual you have $50,000 in salary income, the fact that your business is losing $50,000 shouldn’t shield other taxable income.”

Dickinson said that a small business or sole proprietorship can sometimes manipulate gains and losses from year to year by arranging the dates of payments on major sales and create losses to offset other income.

“I think what the Legislature had in mind was that if we’re not going to tax businesses in a year with income, it would not be fair for businesses to deduct a loss from other income in years with a loss,” Dickinson said.

However, Gordon said that’s “completely nonsensical.”

Most small businesses, she said, lose money when they’re getting started. Who, given the new Kansas tax policy, would want to start a business in Kansas? she asked. What small business person would want to stay in Kansas when they pay more in state income taxes in years when their business loses money than they do in years when their business makes money?

“All that shows me is that they (legislators and state officials) are mean-spirited and don’t care about people who are spending money on a business in hope of turning a profit someday,” she said.